Peabody Energy Corporation Could Join This Trend

Peabody Energy reviewed its met-coal operations and is likely to cut inefficient production, following in the steps of Arch Coal and Walter Industries.

For a long time, Peabody Energy's(NYSE:BTU) Australian met coal mines gave it an edge over many met-coal producers. Finally, as met-coal prices continue to plunge, the company looks ready to slash some higher-cost production. At least this is the conclusion that could be drawn from Peabody Energy CEO Gregory Boyce's answers during the company's recent earnings call. He stated that the company was actively looking at its portfolio in Australia and was ready to make cost-based decisions.

Joining the rising trendPeabody Energy managed to achieve a minuscule $0.22 gross margin per ton from its Australian operations in the first quarter. This happened despite the fact that the company's productivity improvements in Australia led to a 4% reduction in cost per ton. Part of the problem was the North Goonyella mine, which has yet to deliver expected results. Peabody expects that performance at the mine will improve in coming quarters but nevertheless looks ready to optimize its portfolio.

Other coal miners like Arch Coal(NYSE:ACI) and Walter Industries(NASDAQOTH:WLTGQ) have already announced their met-coal production cuts. Walter's move was the most notable, as the company decided to idle all its Canadian operations. The fact that Peabody could join this list is surely favorable for the oversupplied met-coal market.

Second-quarter loss expectedPeabody's U.S. performance was better than its Australian performance in the first quarter, driven by healthy results in its Powder River Basin (PRB) operations. Strong demand in the PRB led to an 8% increase in sales volumes, to 48 million tons. This is a good sign for the PRB-focused Cloud Peak Energy(NYSE:CLD) ahead of its earnings report, which is due on April 29 after market close.

However, Peabody doesn't expect positive results in the second quarter, even with the anticipated improvements in the North Goonyella mine. Peabody expects to report a second-quarter loss of $0.14 to $0.39 per share. The company stated that lower seaborne coal prices would pressure results.

What's more, Peabody's capital spending is going to increase. The company targets $250 million in capital spending this year, down from its previous estimate of $295 million. However, it spent just $24.4 million in the first quarter. Therefore, we can expect Peabody will spend $70 million-$80 million per quarter on its capital projects going forward.

In light of increased capital spending, Peabody's cash flow is important. First-quarter operational cash flow totaled $54.1 million. Given the continued softness in seaborne coal prices, one could expect Peabody to outspend its operational cash flow going forward. However, the company had more than $500 million of cash on the balance sheet at the end of the first quarter and $2.1 billion of total liquidity. Therefore, it will have no problems dealing with cash outflow in the coming quarter.

Bottom linePeabody Energy will likely join the trend of closing higher-cost production. This is a good sign for the met-coal market, as producers were long reluctant to close any mines and financed uneconomical output. Although Peabody Energy is expected to continue losing money, its position is solid. The company has sufficient liquidity to wait for the inevitable upturn in the coal price cycle. That said, it's difficult to expect stellar performance from Peabody's shares in the coming months, as lots of obstacles remain.